The EUR and the ECB. Expectations concerning early ECB action have risen after Draghi’s Jackson Hole speech. The economy has weakened, disinflation has intensified, credit continues to contract, and the exchange rate is still too high for many of the peripheral economies, including Italy. Based on real effective unit labour cost adjusted FX analysis, the Italian EURUSD rate finds its equilibrium near 1.18 Hence, there is need for further monetary accommodation. However, when Draghi spoke at the IMF in Washington in May, investors assumed ECB aggressiveness too, but the ECB’s May interest rate statement leaned towards the hawkish side. Interest rate statements are a reflection of discussion points of the committee and hence show less of the written view from Draghi. However, since spring, Draghi has used press conferences to provide important messages. Also, with interest rates reaching the zero boundary and sovereign bond yields falling to record lows, the ECB will have to concentrate on reducing peripheral private sector funding costs, boosting lending into households and SMEs.

Last and not least, the EUR has become an important tool to generate income and support too low inflation expectations. The press conference is likely to set important nuances. Should Draghi focus on supporting private sector lending, including reducing private sector funding costs instead of keeping its focus on the EUR, then EUR will have the potential to rally. We stick to our view of closing EURUSD short positions at 1.31, awaiting a position adjustment before we look to get back into EUR shorts.

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Any information in this report is based on data considered to be reliable, but no representations or guarantees are made by KBR Capital Partners AS with regard to the accuracy of the data. This information is provided on condition that we accept no responsibility, legal or other for its contents. We, including our directors, officers, employees or publishers, disclaim all liabilities. Any statement constitutes only current opinions, which are subject to change. Neither the information nor any opinion expressed shall be construed to be, or constitute an offer to sell or a solicitation of an offer to buy any investments mentioned herein. Prices can go down as well as up. There is a significant risk involved in derivatives trading, including the risk of loss greater than the original investment. Past performance is no guarantee of future results.Conditions can vary from client to client, and therefore influence performance. The opportunity for profit creates a corresponding risk of loss. Anyone wishing to invest in any of the products mentioned should seek their own financial or professional advice.

Yesterday, the US market was closed due to Labor Day. S&P500 futures made a new all time high this morning at 2006.25. EURUSD is testing 1.31 lows this morning, another 6 months low for that pair. The recent theme of European weakness in both FX and equities continues this morning.

The ECB will be the main factor this week...Their meeting will be Thursday... Here we doubt they will do more than talk about the details of the tltro...QE has about a 30% chance of being mentioned, but after reading the German magazine's comments about Merkel's call to Draghi, we doubt QE will be moving forward at this week's meeting...There is a chance the ECB could cut rates again this week, but we don't think so....It seems that the ECB has thrust the Euro into the carry trade arena.... With zero rates, hedge funds can borrow in Euros at zero and use the proceeds to buy higher risk assets....with the Euro in a steady decline, they will then be able to buy back the Euros cheaper... Geopolitics....We talked to some Chicago Floor traders over the weekend concerning the Russian situation. They argued that Putin is trying to establish a corridor to Crimea to give him full access to the port... And once he accomplishes a state or corridor to Crimea, he will back off....Interesting... Either way, we are starting to think the worse the Ukraine/Russian situation gets the better for European markets...HUH? The worse it gets the more the sanctions...The more thesanctions the worse the Euro economy, especially Germany....The worse the economy, the more aggressive actions by the ECB.. The more the aggressive actions by the ECB, the better for the European markets... The USA outlook...September is the worst market for equities...since 1950 September has been a down market 34 times....up markets 28...yet the US economy seems to be going strongly....of the S+P 500 reporting, 90% have met or exceeded their earnings expectations...on the other hand, of the 12,052 different ratings by sell side firms on the S+P 500 firms, 50% are buys, 44% holds, and only 6% sells....We would not be surprised to see an equity pull back of some kind this month, but if the ECB pushes on the pedal, the pull back could be put off....Bonds are a different story...The nonfarm numbers could be very surprising on Friday...the expectation is 225 on Bloomberg, while 240 in Barrons. An equity article in Barrons, talked about how Russell 1000 stocks have been outperforming Russell 2000 stocks....The reason being, when the US economy starts to heat up, Russell 2000 companies can no longer find cheap employees to hire...That seems to be going on now...

S&P 500 futures are up 9 points at 1784.75 and Dax is up 43 points at 9416.50. We tested key support levels in both the S&P 500 (1767) and the Dax (9320) yesterday and so far these have held up and we might get a bounce going into tomorrow’s FOMC decision. Any indication by the Fed tomorrow that tapering is pushed back could trigger another rally back above 1800 in S&P500.

In Asia: Risk sentiment still strained, however equities manage to pare back some of its intraday losses. Volumes were up vs. the 10, 20 and 30dma's with good flow across sectors. Utilities and Industrials squeeze out gains of 0.18% and 0.15%, but most of the sectors post losses to open the week. Technology and Health Care lag, -0.86% and -0.82%, respectively. Apple earnings exceed estimates, but the stock traded down almost 6% after-close as iPhone sales disappoints.

G10 flows were light overnight, EUR closing flat after trading in a very tight 20 pip range throughout the NY session. USDJPY traded to a low of 101.77 yesterday on Nikkei weakness before rallying to end at 102.55. GBP and AUD outperform slowly but steadily, both up +0.60%.

Treasuries sold off to start the week with 10s closing 3bps weaker and 2y1y off by 5.5 bps. Commodities were broadly in the red overnight as gold drifted lower consistently throughout the day falling 1.40% in spot. Both WTI and Brent fell under pressure, down 0.99% and 1.06%, respectively.

From Bloomberg News: “Industrial & Commercial Bank of China Ltd. said investors in a troubled high-yield trust can recoup their funds, averting a threatened default that underscored concern over the shadow-banking system and helped spur a selloff in emerging-market currencies and stocks. Rights in the 3 billion-yuan ($496 million) product issued by China Credit Trust Co. can be sold to unidentified buyers at a price equal to the value of the principal invested, according to one investor who cited an offer presented by ICBC and asked to be identified only by his surname Chen. China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China’s biggest bank, to contact their financial advisers.”

From Reuters News: “China's local governments have published separate audit reports detailing their combined public debt of $3 trillion for the first time ever, to increase transparency and quell investor concerns. The audits showed China's wealthiest eastern provinces are the most indebted, though repayment burdens are more onerous in poorer areas such as the southwestern province of Guizhou, where the ratio of debt to GDP is the highest, at 79 percent. Most governments were shown repaying the vast majority of their debt on time, though a handful, such as Inner Mongolia, have fallen behind, with the portion of loans due but unpaid running as high as 28 percent.”

From Bloomberg News: “The Federal Reserve would have to disclose more about supervision of the biggest, riskiest banks under legislation aimed at increasing Fed accountability introduced by Representative Scott Garrett, a New Jersey Republican on the House panel overseeing the central bank. The bill would require the Fed to perform a cost-benefit analysis of any new banking rule and disclose more about bank stress tests. The Fed vice chairman would have to testify on financial rule-making if the post of vice chairman for supervision remains unfilled, and the Fed Board would need to release to Congress its internal audit of supervision and regulation.”

From WSJ: “European Central Bank governing council member Jens Weidmann said Monday it is important that citizens know the ECB will uphold its mandate and raise rates at the right time to stop potential inflationary dangers. Speaking at a public question-and-answer session sponsored by a local newspaper, Mr. Weidmann countered criticisms of low interest rates, namely that they hurt savers, noting the advantages of low interest rates, such as cheap building financing and low financing costs for public budgets. These are "different facets of the same situation," he said. "What is important to me is that citizens can rely on us" to maintain the stability of money and that the central bank would react to raise interest rates when necessary, he said.”

From Reuters News: “The euro zone may reopen the debate on how soon it will share the costs of winding down banks after a European Central Bank call to accelerate the move towards mutual support won some backing. The European Union's blueprint to close failing banks depends on a 'resolution' fund, into which banks are to pay roughly 55 billion euros ($75 billion) over 10 years. The money would be used to finance the closing down of insolvent lenders, but initially, in case of a bank wind-down, each country could only use the amount of money that its own banks contributed. With each year, euro zone countries would gradually share more and more money from their funds until all the funds are shared after a decade.”

From Bloomberg News: “Britain’s economy probably capped its best year of growth since 2007 during the last quarter, bringing Mark Carney closer to completing what he calls the “first phase” of his low interest-rate policy. Gross domestic product rose 0.7 percent, near the 0.8 percent pace of the previous three months, according to the median of 39 estimates in a Bloomberg News survey. The data due tomorrow would mark the first full year since the financial crisis when the economy sustained expansion in every quarter. Carney, the Bank of England governor, repeated at the weekend that he wants exceptionally loose monetary policy for some time to give an extra fillip to growth that remains uneven.”

VIX closed at 17.42 yesterday, which is still below the 20 mark that we normally see when corrections gets going, so plenty of upside if things get rough.

Technicals

Market

S&P 500 emini (ES)

Dax

Crude

Corn

Eur/Usd

Res 3

1803

9603

97.30

445

1.3910

Res 2

1797

9550

96.80

436

1.3800

Res 1

1792

9430

96.30

430

1.3730

Sup1

1775

9320

95.50

420

1.3650

Sup 2

1767

9250

92.53

417

1.3530

Sup 3

1741

9170

91.30

405

1.3460

ATM calls Vols. nearby month

14

14

21.13

30.89

7.73

100 EMA

1759

9043

98.08

446

1.3279

200 EMA

1695

8703

98.93

479

1.3202

14 Day avg. Volume

1116K

81K

126K

112K

159K

S&P 500 Emini futures – Bearish momemtum intact below the 1803 resistance level and we need to break below 1767 to really get things moving lower. Remember we have plenty of room down to the 200 day moving average at 1695.

Dax futures – Bounced off the rising trendline (from 4th of September low through 16th Dec low) on the daily chart yesterday and looking for a retracement back towards at least 9550 resistance now.

Corn – Stronger USD hurting corn and cannot really get any real bounce so far, still looks like a long trade, but need to see momentum to get into this one. The big trigger for the bulls would be a daily close above 445.

Crude Oil – Decent bounce off the 91.30 level low from 9th of Jan. and have tested the 97 resistance level, but not been able to really stay above that level. The bulls need to get above 97.00. As long as the 95.50 support holds the recovery mode of the market stays intact.

Euro – We favour selling the Euro on rallies below the 1.3720 resistance level and the first downside target is a 1.3395, followed by key support at 1.3288.

Today’s Economic Calendar (CET):

14:30US Core Durable Goods (0.7%)

15:00US S&P/Case Shiller (13.7%)

16:00US CB Consumer Confidence (78.3)

Contact info:Trading Desk

Tel: +47-40 38 27 52

Email: This email address is being protected from spambots. You need JavaScript enabled to view it.

Any information in this report is based on data considered to be reliable, but no representations or guarantees are made by KBR Capital Partners AS with regard to the accuracy of the data. This information is provided on condition that we accept no responsibility, legal or other for its contents. We, including our directors, officers, employees or publishers, disclaim all liabilities. Any statement constitutes only current opinions, which are subject to change. Neither the information nor any opinion expressed shall be construed to be, or constitute an offer to sell or a solicitation of an offer to buy any investments mentioned herein. Prices can go down as well as up. There is a significant risk involved in derivatives trading, including the risk of loss greater than the original investment. Past performance is no guarantee of future results. Conditions can vary from client to client, and therefore influence performance. The opportunity for profit creates a corresponding risk of loss. Anyone wishing to invest in any of the products mentioned should seek their own financial or professional advice.